Even after surging to new highs this week, buyers can still catch more upside potential in eBay (EBAY), as well as a red-hot railroad stock that looks to be rolling its way onto the new high list.
It was another wild market session on Monday, as the E-mini S&P 500 futures, which traded as high as 1347.50 on Sunday night, dropped to a low of 1327.25 in early trading. They ultimately closed the day’s session at 1340.
In light of the global economic uncertainty, this was quite an encouraging performance, as the early declines were being well supported. There were also a few standouts, as 94 stocks on the NYSE and 82 on the Nasdaq made new yearly highs in Monday’s session.
Quite a few investors and traders avoid even considering stocks on the new high list because the “buy low, sell high” mentality instead makes them more likely to favor stocks making new lows. This is often a mistake, however, as those stocks on the new high list generally have superior relative performance, or RS analysis.
For example, one stock on Monday’s new high list was Expedia Inc. (EXPE), which closed at $50.66. It also was on the new high list on January 18, when it closed at $30.88. It has since gained 64% from the January 18 close.
Another stock on Monday’s new high list was eBay Inc. (EBAY), which broke out above resistance. So does EBAY have common characteristics that could make it follow the same path as EXPE, and are there other stocks that look ready to break out as well?
Chart Analysis: The weekly chart of Expedia Inc. (EXPE) shows the January close (line 1) above the July highs, line a.
- The breakout level (line a) was retested in April before its surge to the upside which was driven by earnings that surprised most analysts
- RS analysis confirmed the breakout in January when it moved through resistance at line b
- Weekly RS line is in a clear uptrend, line c
- Weekly on-balance volume (OBV) also broke to new highs in January when resistance at line d was overcome. Weekly OBV continues to look strong
- There is initial price support at $46-$47.50
eBay Inc. (EBAY) broke out of its weekly trading range, lines e and f, in February. The width of the formation projected a move to the $42 area, a target that was hit on Monday. The Monday close also completed the seven-week trading range for EBAY, and minor upside targets now stand at $46.
- The RS line has been in a solid uptrend since 2010, line h
- The RS line moved through resistance, line g, early in the year and made new highs last week
- OBV broke out to new all-time highs in early 2011 when it surpassed resistance at line i
- OBV has not yet confirmed the recent highs and has formed lower highs, line j. It is still above its weighted moving average (WMA)
- Initial price support is in the $40.60-$41.80 area with more important support near $39.40
NEXT: A Railroad Stock Rolling Towards New Highs
|pagebreak|RailAmerica Inc. (RA) is a $1.2 billion operator of short-line and regional railroads. RA surged to the upside early in the year and has since been in an upward-sloping trading channel.
- A strong close above the resistance at $24.40 should signal a move to the $28-$30 area
- RS analysis broke through resistance, line c, at the end of December, six weeks ahead of prices
- RS line has made new highs in the past few weeks and is still acting strong. There is long-term support for the RS line at line d
- Weekly OBV confirmed the breakout in prices when it overcame resistance at line e
- Volume was very strong to the upside four weeks ago, but the OBV has fallen below its weighted moving average
- Key price support now stands at $20.25-$20.30, which, if broken, would weaken the outlook
What It Means: The weekly relative performance, or RS analysis, can help you identify and hopefully invest in those stocks that will show up on the new high list in the coming weeks.
On June 6, I discussed two health care stocks, DaVita Inc. (DVA) and UnitedHealth Group Inc. (UNH). Both had very positive relative performance analysis, and DVA since made a new yearly high on Monday at $91.89 after gaining over 9% in two weeks. UNH is also now very close to making a new 12-month high.
How to Profit: For eBay Inc. (EBAY), go 50% long at $41.72 and 50% long at $40.58 with a stop at $38.48 (risk of approx. 6.5%). Cancel the order if $43.80 is hit first.
For RailAmerica Inc. (RA), go 50% long at $23.18 and 50% long at $22.78 with a tight stop at $21.86 (risk of approx. 4.9%). Cancel the order if $24.90 is hit first.